Tesla the disruptor fights New Jersey: lessons for all

Profile picture for user gonzodaddy By Den Howlett March 15, 2014
Tesla's fight against the State of New Jersey should give software vendors pause for thought. Here's why.

tesla model s
I see that Elon Musk, CEO Tesla is taking on the state of New Jersey which has outlawed Tesla's direct distribution model with effect from 1st April. By any standard, this takes big balls but more to the point, Musk's argument is not only eloquent, it is brilliantly constructed in a manner that shines light on the nature of disruption.

Now - before going on, I have mixed feelings about the Tesla. For a start I'm not a car person but even so, the Tesla is one heck of a beast. On the one hand I see it as a fantastic example of innovation I both understand and appreciate. Having sat in Ray Wang, CEO Constellation Research's tricked out Tesla S, it is hard to be anything other than impressed with the technology Tesla has brought to bear on the concept of the car as a mode of transport. Taking Wang's economic analysis, it is even harder to argue the economics - at least in California.

On the other hand, a base price of $63,750 puts it well out of reach of the man in the street although leasing might work. That will change as volumes increase and as the company develops other models.

Radical disruption

Returning to Musk's argument, he points out that the protective legislation was introduced as a counterweight to past sins by motor companies, keen to put pressure on dealers. He argues:

The intent was simply to prevent a fair and longstanding deal between an existing auto company and its dealers from being broken, not to prevent a new company that has no franchisees from selling directly to consumers...

...In a handful of states, the laws were written in an overzealous or ambiguous manner. When all auto companies sold through franchises, this didn’t really matter. However, when Tesla came along as a new company with no existing franchisees, the auto dealers, who possess vastly more resources and influence than Tesla, nonetheless sought to force us to sell through them.

So far so good. But it is in Tesla's logic that we see innovation that is the most difficult to argue against:

  1. Auto dealers have a fundamental conflict of interest and that it is hard for them to sell the new when people are used to the old.
  2. No American car maker has successfully launched via a dealership.
  3. Most dealership profits come from after market sales and services - a concept with which Tesla fundamentally disagrees.

It is the last point that intrigues me. Musk says:

I have made it a principle within Tesla that we should never attempt to make servicing a profit center. It does not seem right to me that companies try to make a profit off customers when their product breaks. Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars. I resolved that we would endeavor never to do such a thing at Tesla, as described in the Tesla service blog post I wrote last year.

The Tesla model is intriguing in the context of how we are seeing enterprise software business and delivery models changing over time. I am reminded of Marc Benioff, CEO Salesforce.com's claim that when he founded the company, it was with the idea that business software should be as easy to acquire and use as it is for consumers who use Amazon.

We are a long way from that nirvana but there is little doubt this is how things are moving directionally. In the process, companies are recognizing there are tangible benefits from simplifying their landscapes a la Tesla as Frank Scavo recently discovered in a deep dive customer survey.

What have we learned?

great ideas - hugh
Contrast that with what Leo Apotheker, then CEO SAP said at his first TechEd in 2008. At the time, the message was 'no more upgrades' something that 100% of my developer colleagues thought laughable at best and risible at worst.

The company had become a victim of its own success in selling a Lego set that allows myriad customizations. Apotheker was attempting to steer a course where SAP moves towards much simpler landscapes and delivery via the cloud while attempting to shore up a maintenance model which even then was delivering dubious value in the minds of customers.

On the SI side of the equation, SAP had inadvertently created a monster where, according to some estimates, the software became subsumed in a package of services and hardware that some claim leaves SAP with the highest fully weighted per user cost of any business software. Others will argue value delivered but as we see buyers quietly turning away or shunning the vendors' captive maintenance model one has to ask...where's the upside for customers?

It is easy to pick on SAP - they're the big dog in the room and the same goes for every other vendor that has a strong partner ecosystem. Put bluntly, Accenture, Deloitte, PwC, EY, CSC and many others would not exist in their present form or even be vaguely relevant without the 'gift that keeps giving' in the form of malleable software that often claims wonders yet is a beast to assemble and keep together.

Fast forward to the present and what is changing?

Phil Wainewright proclaims a 'change or die' message in his piece earlier this week:

Vendors are beginning to realize that if their customers remain too long on out-of-date software versions, they become more amenable to considering cloud-based alternatives from competing vendors. Getting the installed base to upgrade is becoming a survival imperative, as customers left on older versions compare what they have to what’s available from the cloud and find it wanting.

Nothing is quite that black and white yet it is hard to argue against the double digit growth our partners Salesforce, FinancialForce and Workday proclaim in the public domain while others yet to go public talk aggressive growth. And especially so when compared with lackluster growth elsewhere.

Old dogs and new tricks?

My concern remains that while the established vendors struggle to find relevance among the new order, I wonder whether they should simply bite the bullet and return to sacrificing profit for growth based upon entirely new streams of business.

They have the developer fire power to establish baseline functionality, but without that fundamental switch of the kind Tesla invokes, their long term future looks increasingly bleak. How can that be when we see the likes of Accenture and SAP inking a deal that ostensibly combines Accenture's deep vertical market IP expertise with SAP's HANA firepower?

Holger Mueller gives the deal a cautiously optimistic thumbs up but I am less certain. The big SIs have hung back on newer technologies until they see markets that can soak up their massive consulting benches. That sounds like a recipe for 'rinse and repeat' of the old models to me and shy of incredibly strong relationships with CIOs who still have clout, I will reserve judgment for seeing outcomes.

Mad Valley anyone?

mad valley
Elsewhere, I am fascinated by initiatives like Mad Valley which hosts a clutch of startups you've never heard of but some of which already count giants like AT&T, Sony, Land Rover, Unilever, Clavin Klein, Charles Schwab, Wells Fargo, Starbucks...the list goes on and on...as customers driving value.

This is in sharp contrast to the past where small vendors could not get a toe in the door let alone win business at major brands. But then Mad Valley is fostering a community of interest in solving some very big, hairy marketing problems in a world where traditional advertising has been finally exposed for the 'Emperor's new clothes' model it always was but which no-one could adequately prove.

And that is only one tiny slice of a new set of markets that are evolving rapidly to come into the buyers' line of vision.

Final thought

Rather than a verdict I'm going to pose a set of questions:

  1. Does the Tesla disruptive model provide lessons from which enterprise software buyers and sellers can learn?
  2. Are we seeing a genuine change in large scale buying decisions?
  3. Is the cloud model enough to save the old guard?
  4. What can the old guard bring to trump the startup communities?

I know what I think but I leave readers to make their own minds up.

Image credit: Hugh MacLeod